UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the quarterly period ended September 26, 2004 | ||
|
|
|
OR | ||
|
|
|
o |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
Commission file number 0-24746
TESSCO Technologies Incorporated | ||
(Exact name of registrant as specified in charter) | ||
|
|
|
Delaware |
| 52-0729657 |
(State or other jurisdiction of |
| (IRS Employer |
|
|
|
11126 McCormick Road, Hunt Valley, Maryland |
| 21031 |
(Address of principal executive offices) |
| (Zip Code) |
|
|
|
Registrant’s telephone number, including area code: |
| (410) 229-1000 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
Yes o No ý
The number of shares of the registrant’s Common Stock, $ .01 par value per share, outstanding as of November 5, 2004 was 4,202,100.
TESSCO Technologies Incorporated
Index to Form 10-Q
2
Part I – Financial Information
Item 1 – Financial Statements
TESSCO TECHNOLOGIES INCORPORATED
|
| September 26, |
| March 28, |
| ||
|
| (unaudited) |
| (audited) |
| ||
ASSETS |
|
|
|
|
| ||
|
|
|
|
|
| ||
CURRENT ASSETS: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 8,535,200 |
| $ | 6,765,600 |
|
Trade accounts receivable, net |
| 53,858,000 |
| 47,124,600 |
| ||
Product inventory |
| 45,952,200 |
| 40,987,100 |
| ||
Deferred tax asset |
| 2,079,000 |
| 2,079,000 |
| ||
Prepaid expenses and other current assets |
| 2,725,400 |
| 2,494,300 |
| ||
Total current assets |
| 113,149,800 |
| 99,450,600 |
| ||
|
|
|
|
|
| ||
PROPERTY AND EQUIPMENT, net |
| 25,676,900 |
| 25,944,700 |
| ||
GOODWILL, net |
| 2,452,200 |
| 2,452,200 |
| ||
OTHER LONG-TERM ASSETS |
| 1,233,200 |
| 1,281,200 |
| ||
Total assets |
| $ | 142,512,100 |
| $ | 129,128,700 |
|
|
|
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
|
|
|
|
|
| ||
CURRENT LIABILITIES: |
|
|
|
|
| ||
Trade accounts payable |
| $ | 67,163,500 |
| $ | 55,250,000 |
|
Accrued expenses and other current liabilities |
| 6,969,300 |
| 6,588,500 |
| ||
Revolving credit facility |
| — |
| — |
| ||
Current portion of long-term debt |
| 360,400 |
| 282,000 |
| ||
Total current liabilities |
| 74,493,200 |
| 62,120,500 |
| ||
|
|
|
|
|
| ||
DEFERRED TAX LIABILITY |
| 3,419,100 |
| 3,419,100 |
| ||
LONG-TERM DEBT, net of current portion |
| 5,182,500 |
| 5,354,700 |
| ||
OTHER LONG-TERM LIABILITIES |
| 1,710,500 |
| 1,900,900 |
| ||
Total liabilities |
| 84,805,300 |
| 72,795,200 |
| ||
|
|
|
|
|
| ||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
| ||
|
|
|
|
|
| ||
SHAREHOLDERS’ EQUITY: |
|
|
|
|
| ||
Preferred stock |
| — |
| — |
| ||
Common stock |
| 48,700 |
| 48,500 |
| ||
Additional paid-in capital |
| 23,172,100 |
| 22,250,200 |
| ||
Treasury stock, at cost |
| (7,142,700 | ) | (4,547,000 | ) | ||
Retained earnings |
| 41,628,700 |
| 38,581,800 |
| ||
Total shareholders’ equity |
| 57,706,800 |
| 56,333,500 |
| ||
Total liabilities and shareholders’ equity |
| $ | 142,512,100 |
| $ | 129,128,700 |
|
See accompanying notes.
3
TESSCO TECHNOLOGIES INCORPORATED
Consolidated Statements of Income
|
| Fiscal Quarters Ended |
| Six Months Ended |
| ||||||||
|
| September 26, |
| September 28, |
| September 26, |
| September 28, |
| ||||
|
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
| $ | 115,689,700 |
| $ | 81,928,500 |
| $ | 226,294,700 |
| $ | 151,919,600 |
|
Cost of goods sold |
| 92,708,200 |
| 62,664,700 |
| 180,923,800 |
| 115,350,100 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
| 22,981,500 |
| 19,263,800 |
| 45,370,900 |
| 36,569,500 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
| 20,309,500 |
| 18,522,800 |
| 40,298,600 |
| 36,304,300 |
| ||||
Benefit from insurance proceeds |
| — |
| (3,054,000 | ) | — |
| (3,054,000 | ) | ||||
|
| 20,309,500 |
| 15,468,800 |
| 40,298,600 |
| 33,250,300 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income from operations |
| 2,672,000 |
| 3,795,000 |
| 5,072,300 |
| 3,319,200 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest, net |
| 42,700 |
| 42,600 |
| 77,400 |
| 80,500 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before provision for income taxes |
| 2,629,300 |
| 3,752,400 |
| 4,994,900 |
| 3,238,700 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Provision for income taxes |
| 1,025,400 |
| 1,463,400 |
| 1,948,000 |
| 1,263,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 1,603,900 |
| $ | 2,289,000 |
| $ | 3,046,900 |
| $ | 1,975,700 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share |
| $ | 0.37 |
| $ | 0.52 |
| $ | 0.69 |
| $ | 0.44 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted earnings per share |
| $ | 0.36 |
| $ | 0.52 |
| $ | 0.68 |
| $ | 0.44 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic weighted average shares outstanding |
| 4,376,500 |
| 4,416,800 |
| 4,405,800 |
| 4,443,500 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Diluted weighted average shares outstanding |
| 4,440,700 |
| 4,422,600 |
| 4,492,600 |
| 4,446,800 |
| ||||
See accompanying notes.
4
TESSCO Technologies Incorporated
Consolidated Statements of Cash Flows
|
| Six Months Ended |
| ||||
|
| September 26, |
| September 28, |
| ||
|
| (unaudited) |
| (unaudited) |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net income |
| $ | 3,046,900 |
| $ | 1,975,700 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 2,109,700 |
| 1,958,700 |
| ||
Other non-cash items |
| 356,600 |
| 60,900 |
| ||
Increase in trade accounts receivable |
| (6,733,400 | ) | (2,226,100 | ) | ||
Increase in product inventory |
| (4,965,100 | ) | (5,853,900 | ) | ||
(Increase) decrease in prepaid expenses and other current assets |
| (231,100 | ) | 8,142,300 |
| ||
Increase in trade accounts payable |
| 11,913,500 |
| 5,655,100 |
| ||
Increase (decrease) in accrued expenses and other current liabilities |
| 380,800 |
| (1,694,700 | ) | ||
Net cash provided by operating activities |
| 5,877,900 |
| 8,018,000 |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Acquisition of property and equipment |
| (1,811,900 | ) | (2,047,300 | ) | ||
Net cash used in investing activities |
| (1,811,900 | ) | (2,047,300 | ) | ||
|
|
|
|
|
| ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
Payments on long-term debt |
| (93,800 | ) | (197,300 | ) | ||
Proceeds from issuance of stock |
| 393,100 |
| 82,000 |
| ||
Purchase of treasury stock |
| (2,595,700 | ) | (754,400 | ) | ||
Net cash used in financing activities |
| (2,296,400 | ) | (869,700 | ) | ||
|
|
|
|
|
| ||
Net increase in cash and cash equivalents |
| 1,769,600 |
| 5,101,000 |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, beginning of period |
| 6,765,600 |
| — |
| ||
|
|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, end of period |
| $ | 8,535,200 |
| $ | 5,101,000 |
|
See accompanying notes.
5
TESSCO Technologies Incorporated
Notes to Consolidated Financial Statements
September 26, 2004
(Unaudited)
Note 1. Description of Business and Basis of Presentation
TESSCO Technologies Incorporated, a Delaware corporation (the Company), is a leading provider of integrated product plus supply chain solutions to the professionals that design, build, run, maintain and use wireless voice, data, messaging, location tracking and Internet systems. The Company provides marketing and sales services, knowledge and supply chain management, and product-solution delivery and control systems utilizing extensive Internet and information technology. Over 95% of the Company’s sales are made to customers in the United States. The Company takes orders in several ways, including phone, fax, online and through electronic data interchange.
In management’s opinion, the accompanying interim financial statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been omitted from these statements, as permitted under the applicable rules and regulations. The results of operations presented in the accompanying interim financial statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended March 28, 2004.
Note 2. Stock Options Granted to Employees and Stock Option Repurchase Program
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure.” SFAS No. 148 amends the transition and disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” This statement was effective for financial statements for fiscal years ending after December 15, 2002 and for interim periods beginning after December 15, 2002. Prior to fiscal 2005, as permitted by SFAS No. 148 and SFAS No. 123, the Company used the intrinsic value method to account for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense, except as noted below had been recognized for the Company’s stock options prior to fiscal 2005 because all options were granted at an exercise price equal to the market value of the underlying stock on the grant date.
Effective, March 29, 2004, the Company elected to adopt the fair value provisions of SFAS No. 123 using the modified prospective method in accordance with SFAS No. 148. Accordingly, beginning in fiscal 2005, the Company has begun expensing stock options and other equity compensation instruments using fair value methods. Stock-based employee compensation cost recognized in fiscal 2005 is the same as that which would have been recognized had the fair value recognition provisions of SFAS No. 123 been applied to all awards granted after August 1, 1995. Results for prior periods have not been restated.
Prior to March 29, 2004, the Company has annually reported pro-forma net income and earnings per share information in accordance with SFAS No. 123, that is, as if it had accounted for stock options using the fair value method prescribed by SFAS No. 123. In accordance with SFAS No. 123, the fair value of the Company’s stock options is determined using the Black-Scholes option-pricing model, based upon facts and assumptions existing at the date of grant. The value of each option at the date of grant is amortized as compensation expense over the option vesting period. This occurs without regard to subsequent changes in stock price, volatility or interest rates over time, provided that the option remains outstanding. This model, and other option pricing models, were developed for
6
use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. The Company’s options are not traded and have certain vesting restrictions. Because the Company’s stock options have characteristics significantly different from those of traded options, and because the value is determined at the date of grant and is amortized to expense over the vesting period without regard to changes in stock price, volatility or interest rates, the fair value calculated under the option models currently available may not reflect the actual fair value of the Company’s options.
On April 28, 2003, the Company’s Board of Directors authorized the Company to proceed with a stock option repurchase program. The repurchase program was completed on June 5, 2003, at which time options for 743,545 shares were repurchased and cancelled. This program resulted in compensation expense and cash paid of approximately $510,000 ($312,000, net of tax), which is included in selling, general and administrative expenses in the Company’s Consolidated Statement of Income for the quarter ended June 29, 2003. The amount paid for these options was determined on the basis of a discounted Black-Scholes calculation, using then current input assumptions.
As required by SFAS No. 123, the estimated fair value of each option, as determined as of the date of grant, is amortized as compensation expense over the option vesting period, provided the option remains outstanding. However, when an option is repurchased, it is no longer outstanding and the then unamortized portion of its value as had been determined at the grant date, is recognized as compensation expense at the date of repurchase for SFAS No. 123 pro-forma purposes. Accordingly, although the amount actually paid by the Company for the repurchased options on the basis of a discounted current Black-Scholes calculation was $510,000 ($312,000 net of tax), the unamortized compensation expense of these same options, based on the Black-Scholes calculation fixed at the date of grant, was approximately $1.7 million. Under SFAS No. 123, the latter amount was recognized as expense for pro-forma disclosure purposes in the first quarter of fiscal 2004.
In April 2004, the Company’s Board of Directors established a Performance Stock Unit Award Program under the Company’s 1994 Stock and Incentive Plan. Under the program, Performance Stock Units (PSU) have been granted to selected individuals. Each PSU entitles the recipient to earn one share of TESSCO common stock, but only after earnings per share and, for non-director employee participants, individual performance targets are met over a defined performance cycle. Once earned, shares vest and are issued over a period of four years. Earnings per share targets, which take into account the earnings impact of this program, were set in advance for the complete performance cycle by the Board of Directors at levels necessary to grow shareowner value, and represent continual increases in earnings per share. If actual performance does not reach the minimum threshold targets, no shares will be issued. At the minimum threshold performance targets, up to a total of 153,000 shares could be issued. If actual performance over the three-year period reaches the highest level of targets and each recipient continues as a TESSCO employee until May 2008, a maximum of 600,000 shares of common stock could be issued over the four-year period ending May 2008. Under FASB No. 123, the Company records compensation expense on its PSUs over the vesting period, based on the number of shares management estimates will ultimately be issued. Accordingly, the Company determines the periodic financial statement compensation charge based upon the stock price at the PSU grant date; management’s projections of future EPS performance over the performance cycle; and the resulting amount of estimated share grants, net of actual forfeitures. Future changes in factors impacting the ultimate number of shares granted could cause these estimates to change in future periods. During the second quarter and first six months of fiscal 2005, the Company recognized stock compensation expense, primarily associated with the PSUs of $174,700 and $658,300, respectively, which is included as selling, general and administrative expense in the Consolidated Statements of Income.
Had the Company determined compensation cost based on the fair value at the grant date for its stock options consistent with the method set forth under SFAS No. 123, the Company’s net earnings would have been reduced to the pro forma amounts indicated below for the second quarter and six months ended September 28, 2003 (in thousands):
7
|
| Fiscal Quarter Ended |
| Six Months Ended |
| ||
|
|
|
|
|
| ||
Net income, as reported |
| $ | 2,289 |
| $ | 1,976 |
|
Compensation expense included in net income, net of tax |
| 4 |
| 316 |
| ||
Stock-based compensation expense, relating to the previously unrecognized compensation expense of options purchased in the option repurchase program, as if the fair value method had been applied, net of tax |
| — |
| (1,660 | ) | ||
Stock-based compensation expense, relating to continuing stock options as if the fair value method had been applied, net of tax |
| (42 | ) | (245 | ) | ||
Pro-forma income |
| $ | 2,251 |
| $ | 387 |
|
|
|
|
|
|
| ||
Basic earnings per share, as reported |
| $ | 0.52 |
| $ | 0.44 |
|
Pro-forma basic earnings per share |
| 0.51 |
| 0.09 |
| ||
|
|
|
|
|
| ||
Diluted earnings per share, as reported |
| $ | 0.52 |
| $ | 0.44 |
|
Pro-forma diluted earnings per share |
| 0.51 |
| 0.09 |
| ||
Also during the first 6 months of fiscal 2005, the Company issued 21,194 shares of common stock related to stock option exercises, 401(k) Plan matches and sales to employees under the Team Member Stock Purchase Plan.
Note 3. Earnings Per Share
The dilutive effect of all options outstanding has been determined by using the treasury stock method. The weighted average shares outstanding is calculated as follows:
|
| Fiscal Quarters Ended |
| Six Months Ended |
| ||||
|
| September 26, |
| September 28, |
| September 26, |
| September 28, |
|
Basic weighted average common shares outstanding |
| 4,376,500 |
| 4,416,800 |
| 4,405,800 |
| 4,443,500 |
|
Effect of dilutive common equivalent shares |
| 64,200 |
| 5,800 |
| 86,800 |
| 3,300 |
|
Diluted weighted average shares outstanding |
| 4,440,700 |
| 4,422,600 |
| 4,492,600 |
| 4,446,800 |
|
Options to purchase 84,875 shares of common stock at a weighted average exercise price of $18.35 per share were outstanding as of September 26, 2004, but the common equivalent shares were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect of including such shares would be antidilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options.
During the second quarter and first six months of fiscal 2005, the Company purchased 229,403 shares of its common stock under its stock buyback program authorized by the Board of Directors in April 2003. As of September 26, 2004, the Company has purchased an aggregate of 342,303 shares of its outstanding common stock pursuant to this program, which was authorized for up to 450,000 shares and currently has no timetable for completion.
Note 4. Business Segments
Beginning in fiscal 2004, the Company began regularly evaluating revenue, gross profit and inventory as three business segments.
8
Network infrastructure products are used to build, repair and upgrade wireless telecommunications, computing and Internet networks, and generally complement radio frequency transmitting and switching equipment provided directly by original equipment manufacturers (OEMs). Mobile devices and accessory products include cellular telephones, pagers and two-way radios and related accessories such as replacement batteries, cases, microphones, speakers, mobile amplifiers, power supplies, headsets, mounts, car antennas and various wireless data devices. Installation, test and maintenance products are used to install, tune, maintain and repair wireless communications equipment. Within the mobile devices and accessories line of business, the Company sells to both commercial and consumer markets. The network infrastructure and installation, test and maintenance lines of business sell primarily to commercial markets.
The Company measures segment performance based on segment gross profit. The segment operations develop their product offering, pricing and strategies, which are collaborative with one another and the centralized sales and marketing function. Therefore, the Company does not segregate assets, other than inventory, for internal reporting, evaluating performance or allocating capital. Accounting policies for measuring segment gross profit and inventory are substantially consistent with those described in Note 2 to the Company’s March 28, 2004 audited financial statements. Product delivery revenue and certain minor cost of sales expenses have been allocated to each segment based on a percentage of revenues and gross profit.
Segment activity for the periods ended September 26, 2004 and September 28, 2003 is as follows:
In thousands |
| Network |
| Mobile Devices |
| Installation, Test |
| Total |
| ||||
Three months ended September 26, 2004 |
|
|
|
|
|
|
|
|
| ||||
Revenue-Commercial |
| $ | 32,482 |
| $ | 18,583 |
| $ | 15,750 |
| $ | 66,815 |
|
Revenue-Affinity Consumer Direct |
| — |
| 48,875 |
| — |
| 48,875 |
| ||||
Revenue-Total |
| 32,482 |
| 67,458 |
| 15,750 |
| 115,690 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross Profit-Commercial |
| 7,322 |
| 5,015 |
| 4,142 |
| 16,479 |
| ||||
Gross Profit-Affinity Consumer Direct |
| — |
| 6,503 |
| — |
| 6,503 |
| ||||
Gross Profit-Total |
| 7,322 |
| 11,518 |
| 4,142 |
| 22,982 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Product Inventory |
| 17,161 |
| 23,514 |
| 5,277 |
| 45,952 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Three months ended September 28, 2003 |
|
|
|
|
|
|
|
|
| ||||
Revenue-Commercial |
| $ | 30,753 |
| $ | 15,218 |
| $ | 12,034 |
| $ | 58,005 |
|
Revenue-Affinity Consumer Direct |
| — |
| 23,924 |
| — |
| 23,924 |
| ||||
Revenue-Total |
| 30,753 |
| 39,142 |
| 12,034 |
| 81,929 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross Profit-Commercial |
| 7,409 |
| 3,851 |
| 3,157 |
| 14,417 |
| ||||
Gross Profit-Affinity Consumer Direct |
| — |
| 4,847 |
| — |
| 4,847 |
| ||||
Gross Profit-Total |
| 7,409 |
| 8,698 |
| 3,157 |
| 19,264 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Product Inventory |
| 15,374 |
| 12,522 |
| 4,598 |
| 32,494 |
| ||||
9
In thousands |
| Network |
| Mobile Devices |
| Installation, Test |
| Total |
| ||||
Six months ended September 26, 2004 |
|
|
|
|
|
|
|
|
| ||||
Revenue-Commercial |
| $ | 65,335 |
| $ | 35,434 |
| $ | 31,422 |
| $ | 132,191 |
|
Revenue-Affinity Consumer Direct |
| — |
| 94,104 |
| — |
| 94,104 |
| ||||
Revenue-Total |
| 65,335 |
| 129,538 |
| 31,422 |
| 226,295 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross Profit-Commercial |
| 15,286 |
| 9,406 |
| 8,398 |
| 33,090 |
| ||||
Gross Profit-Affinity Consumer Direct |
| — |
| 12,281 |
| — |
| 12,281 |
| ||||
Gross Profit-Total |
| 15,286 |
| 21,687 |
| 8,398 |
| 45,371 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Product Inventory |
| 17,161 |
| 23,514 |
| 5,277 |
| 45,952 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Six months ended September 28, 2003 |
|
|
|
|
|
|
|
|
| ||||
Revenue-Commercial |
| $ | 55,942 |
| $ | 28,412 |
| $ | 24,262 |
| $ | 108,616 |
|
Revenue-Affinity Consumer Direct |
| — |
| 43,304 |
| — |
| 43,304 |
| ||||
Revenue-Total |
| 55,942 |
| 71,716 |
| 24,262 |
| 151,920 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gross Profit-Commercial |
| 13,602 |
| 7,230 |
| 6,551 |
| 27,383 |
| ||||
Gross Profit-Affinity Consumer Direct |
| — |
| 9,187 |
| — |
| 9,187 |
| ||||
Gross Profit-Total |
| 13,602 |
| 16,417 |
| 6,551 |
| 36,570 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Product Inventory |
| 15,374 |
| 12,522 |
| 4,598 |
| 32,494 |
| ||||
Note 5. Long-Term Debt
Effective June 30, 2004, the Company refinanced its previously existing term loan with a bank. The new term loan in the original amount of $4,500,000 is payable in monthly installments of principal and interest with the balance due at maturity, June 30, 2011. The note bears interest at a floating rate of LIBOR plus 1.75%. The note is secured by a first position deed of trust encumbering the Company-owned real property in Hunt Valley, Maryland. The loan is generally subject to the same financial covenants as the Company’s revolving credit facility, which requires the Company to meet certain financial covenants and ratios and contains other limitations, including a restriction on dividend payments.
Note 6. Commitments and Contingencies
Effective April 1, 2001, the Company entered into a lease, which expires in March 2006, for an additional 65,000 square feet of distribution and office space in Hunt Valley, Maryland, adjacent to the Company’s Global Logistics Center. The Company consolidated the operations previously housed in this facility into its Global Logistics Center in the third quarter of fiscal 2004 and recorded consolidation charges of $2.1 million representing exit costs including asset write-offs and the present value of the continuing lease obligation associated with the vacated facility. Monthly rent of approximately $47,000 is due through March 2006. The Company has a $818,300 liability on its Consolidated Balance Sheet at September 26, 2004, representing the present value of continuing lease obligations related to this vacated facility.
10
The Company has entered into a lease for space for its sales, marketing and administrative offices nearby its Global Logistics Center, for a term that began June 1, 2004 and which will expire May 31, 2007. However, the Company can terminate the lease by giving twelve months written notice at any time after June 1, 2004. The monthly rental fee ranges from $110,300 to $117,200 throughout the lease term.
Lawsuits and claims are filed against the Company from time to time in the ordinary course of business. The Company does not believe that any lawsuits or claims pending against the Company, individually or in the aggregate, are material, or will have a material adverse affect on the Company’s financial condition or results of operations.
Note 7. Customer Concentration
The Company’s largest customer relationship, T-Mobile USA (T-Mobile), accounted for 39% and 26% of total revenues and 19% and 20% of total gross profit in the second quarters of fiscal 2005 and 2004, respectively. T-Mobile accounted for 38% and 25% of total revenues and 19% and 18% of total gross profit in the six months ended September 26, 2004 and September 28, 2003, respectively. This relationship is similar to most of the Company’s affinity-partner relationships, which are of limited duration and terminable by either party upon several months or otherwise relatively short notice. As previously disclosed, T-Mobile is planning to transition this relationship from TESSCO to an in-house system with an alternative third party logistics provider. In October 2004, the Company reached agreement with T-Mobile to continue to service T-Mobile through July 31, 2005, at which time T-Mobile is expected to complete this transition. Thereupon, revenues from this affinity relationship will cease.
Note 8. Reclassifications
Certain reclassifications have been made to the prior year Consolidated Financial Statements to conform with the current year presentation.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Form 10-K for the fiscal year ended March 28, 2004.
Business Overview and Environment
TESSCO Technologies Incorporated is a leading provider of integrated product plus supply chain solutions to the professionals that design, build, run, maintain and use wireless voice, data, messaging, location tracking and Internet systems. Although we sell products to customers in over 100 countries, over 95% of our sales are made to customers in the United States. We have operations and office facilities in both Hunt Valley, Maryland and Reno, Nevada. Due to the diversity in our business, we are not significantly affected by seasonality.
We offer a wide range of products that are classified into three business segments: network infrastructure, mobile devices and accessories, and installation, test and maintenance. Network infrastructure products, which are sold to our commercial sell-to and sell-through customers, are used to build, repair and upgrade wireless telecommunications, computing and Internet networks. Sales of traditional network infrastructure products are in part dependent on capital spending in the wireless communications industry. However, we have also been growing our offering of wireless broadband and in-building products, which are not as dependent on the overall capital spending of the industry. Mobile devices and accessory products include cellular telephones, pagers and two-way radios and related accessories. Mobile devices and accessory products are widely sold to commercial sell-to and sell-through customers and consumers. Commercial customers include retail stores, value-added resellers and dealers. Consumers are primarily reached through our affinity partnerships, where we offer services including customized order fulfillment, outsourced call centers, and building and maintaining private label Internet sites. Installation, test and maintenance products, which are sold to our commercial sell-to and sell-through customers,
11
are used to install, tune, maintain and repair wireless communications equipment. Approximately half of all of our installation test and maintenance sales are generated from the sales of replacement parts and materials for original equipment manufacturers such as Nokia, Inc (Nokia). The other portion of this segment is made up of sophisticated analysis equipment and various frequency-, voltage- and power-measuring devices, as well as an assortment of tools, hardware and supplies required by service technicians. Both our repair and replacement parts sales and consumer sales through our affinity partnerships are reliant on relationships with a small number of vendors.
The emerging wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessory market, and the risk of new competitors entering the market is high. In addition, the agreements or arrangements with our customers or vendors looking to us for product and supply chain solutions, including those with T-Mobile USA (T-Mobile), our largest affinity partner, and Nokia, are typically of limited duration and are terminable by either party upon several months or otherwise relatively short notice. Accordingly, our ability to maintain these relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, our large customer base and purchasing relationships with approximately 450 manufacturers provide us with a competitive advantage over new entrants to the market.
As previously disclosed, T-Mobile is planning to transition the TESSCO provided e-commerce marketing and sales system to an in-house web solution and alternative third-party logistics provider. In October 2004, we reached agreement with T-Mobile to continue providing our system through July 31, 2005, at which time T-Mobile will complete this transition. Thereupon, revenues from this affinity relationship will cease. During the second quarter of fiscal 2005, T-Mobile represented 39% of our revenues and 19% of our overall corporate gross profit. During the first six months of fiscal 2005, T-Mobile represented 38% of our revenues and 19% of our overall corporate gross profit.
Under the terms of the agreement reached in October, we will continue servicing T-Mobile and its customers during the transition period, which will extend through July 2005. Unless we replace the lost T-Mobile business between now and then with new or additional business, the loss of T-Mobile as a customer will have a material adverse effect on our revenues, margins, and profits. However, management intends to diligently focus between now and July 2005 on redeploying resources to new opportunities and reducing expenses in an effort to lessen the impact of the loss of the T-Mobile business. There can be no assurances about the extent to which we will be able to lessen the impact. Regardless of the impact, we do not believe the scheduled termination of the T-Mobile relationship will cause any material impairment of the Company’s assets.
Second quarter results in fiscal 2005 were driven primarily by revenue growth and gross profit growth in our mobile devices and accessories and our installation, test and maintenance lines of business as compared with the second quarter in fiscal 2004. Our network infrastructure line of business achieved a small revenue growth, but a slight decline in gross profit due to a change in product sales mix. Commercial customer (sell-to and sell-through market categories) revenue growth and gross profit growth were 15% and 14%, respectively. Consumer customer revenue growth and gross profit growth were 104% and 34%, respectively. We also achieved overall revenue and gross profit growth of 5% and 3%, respectively, as compared with the first quarter of fiscal 2005. This sequential growth was driven primarily by consumer revenues and gross profits, which increased 8% and 13%, respectively. Commercial revenues for the second quarter of fiscal 2005 increased 2% over the first quarter, primarily driven by sales with our mobile devices and accessories line of business. However, due to product mix, overall commercial gross profit decreased 1%, respectively, from the first quarter of fiscal 2005.
12
Second Quarter of Fiscal 2005 Compared to Second Quarter of Fiscal 2004
Revenues increased by $33.8 million, or 41%, to $115.7 million for the second quarter of fiscal 2005 compared to $81.9 million for the second quarter of fiscal 2004. Revenues from mobile devices and accessories increased 72% and revenues from network infrastructure products increased 6% and revenues from test and maintenance products increased 31%. Network infrastructure, mobile devices and accessories, and test and maintenance products accounted for approximately 28%, 58% and 14%, respectively, of revenues during the second quarter of fiscal 2005, as compared to 37%, 48% and 15%, respectively, of revenues during the second quarter of fiscal 2004. Commercial sell-through customers, commercial sell-to customers and consumers accounted for approximately 32%, 26% and 42%, respectively, of revenues during the second quarter of fiscal 2005, compared to 38%, 33% and 29%, respectively, of revenues during the second quarter of fiscal 2004.
The increase in mobile devices and accessories revenues was primarily due to strong growth in our affinity consumer-direct sales channel, but also reflects growth in our commercial business. In the second quarter of 2005, sales of mobile devices and accessories through our affinity consumer-direct sales channel represented 42% of our total revenues, but because a significant portion of these sales relate to lower margin handset sales as described below, gross profit from this channel represented only 28% of our total gross profit. The significant increase in affinity consumer-direct revenues is attributed to increased volumes from our T-Mobile affinity relationship. This relationship is an e-commerce, complete supply-chain relationship. We sell and deliver wireless telephones and accessories to consumers and other end-users. We purchase the telephones and accessories, record orders via Internet ordering tools and hotlines, and then serialize, package and kit the telephones and accessories for delivery to the end-user. Revenues from this affinity relationship with T-Mobile collectively accounted for approximately 39% of total revenues in the second quarter of fiscal 2005; however, gross profit generated through the T-Mobile relationship represented approximately 19% of our total gross profit. We expect to continue to provide to T-Mobile through July 31, 2005, at which time T-Mobile is expected to complete its transition to an in-house web solution and alternative third party logistics provider. Thereupon, revenues from this affinity relationship will cease. Commercial revenues for mobile devices and accessories increased 22% over the prior year quarter, due in part to enhanced merchandising and packaging programs, new retail relationships and an increase in data messaging product sales.
The increase in our network infrastructure sales is attributable to a small percentage increase in sales of Radio Frequency (RF) propagation products such as antennas and cable and a larger percentage increase in broadband and in-building product sales. The market for RF propagation products continues to be challenging, but we believe that pent up demand for new technologies and increased spending in homeland security and public safety have contributed to our growth in this line of business. There can be no assurance that these trends will continue.
The increase in installation, test and maintenance revenues is primarily attributable to increased sales of high dollar test equipment and increased sales of repair and replacement parts under our relationships with several Original Equipment Manufacturers. We believe that the increased capital spending leading to our growth in network infrastructure sales has also contributed to the increase in installation, test and maintenance sales.
Gross profit increased by $3.7 million, or 19%, to $23.0 million for the second quarter of fiscal 2005 compared to $19.3 million for the second quarter of fiscal 2004. Gross profit margin percent decreased to 19.9% for the second quarter of fiscal 2005 compared to 23.5% for the second quarter of fiscal 2004. Gross profit margin for network infrastructure, mobile devices and accessories and installation, test and maintenance products was 22.5%, 17.1% and 26.3%, respectively, for the second quarter of fiscal 2005, as compared to 24.1%, 22.2% and 26.2%, respectively, for the second quarter of fiscal 2004. The decrease in gross profit margin percent for mobile devices and accessories was attributable to the increased revenues from the T-Mobile affinity relationship, which includes high volumes of lower margin handset sales. The decrease in network infrastructure gross margin percent is due to increased sales of lower margin broadband products and a reduction in gross profit margin percent for RF propagation sales due to several large build sales during the quarter. Gross profit margin percent in our installation, test and maintenance line of business has been sustained and the minor variation is related to sales mix within the segment product offering. We account for inventory at the lower of cost or market and as a result, write-offs/write downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.
13
Our on-going ability to earn revenues from customers and vendors looking to us for product and supply chain solutions is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each affinity relationship often differ. Among these factors are the strength of the customer’s or vendor’s business, the supply and demand for the product or service, including price stability, changing customer or vendor requirements, and our ability to support the customer or vendor and to continually demonstrate that we can improve the way they do business. In addition, the agreements or arrangements on which our affinity relationships are based are typically of limited duration, and are terminable by either party upon several months or otherwise relatively short notice. These affinity relationships could also be affected by wireless carrier consolidation.
Over the past seven years, the T-Mobile relationship has become significant to our overall business. During the second quarter of fiscal 2005, this relationship accounted for 39% of total revenues, or approximately $45 million, and 19%, or approximately $4 million, of our overall corporate gross profit. The gross profit margin on these revenues was approximately 9.8% for the second quarter of fiscal 2005, compared to gross profit margin on non T-Mobile revenues of approximately 26.7% for the same period. The 9.8% T-Mobile gross profit margin is after product-material costs only, and does not include operating or indirect expenses necessary to support this business. These expenses are a significant portion of overall selling, general and administrative expenses and include: freight out and distribution supplies; compensation and benefit costs related to fulfillment and returns processing, in-bound call center, program management, and credit and collections; credit card fees and bad debt expenses related to cash collections directly from end users; and e-commerce expenses. Indirect expenses include executive involvement, depreciation of technology and operating assets, facilities, and other overhead costs.
Total selling, general and administrative expenses increased by 10% for the second quarter of fiscal 2005 compared to the second quarter of fiscal 2004. Because total revenues increased at a higher rate (41%), selling, general and administrative expenses as a percent of revenue declined to 17.6% in the second quarter of fiscal 2005 from 22.6% for the second quarter of fiscal 2004. The largest factor of the $1.8 million increase in total selling, general and administrative expenses were increased fulfillment costs associated with the large growth in consumer revenue. Consumer orders are typically smaller in size and weight and many items are delivered to residences, not typical places of business. The resulting freight charges we pay to third party common carriers with whom we contract for those deliveries are greater, as a percentage of revenue, than larger commercial shipments. Also contributing to the increase are costs associated with our reward plans, including the expensing of stock options and expenses associated with our recently issued Performance Stock Units. Occupancy costs have also increased due to rent and related costs associated with our sales, marketing and administrative offices. Through May of this fiscal year, these occupancy obligations were reimbursed through insurance proceeds, and in June of this fiscal year, we became solely responsible for these ongoing obligations. This rental expense increase was partially offset by rent expense savings related to a facility that was consolidated into our Global Logistics Center in the third quarter of fiscal 2004, at which time we incurred a charge for the remaining lease payments for the consolidated facility, which run through March 2006. Information technology expense increased approximately $250,000, primarily related to preliminary project stage activities, which were completed during the quarter, associated with our configuration, fulfillment and delivery warehouse management system that is currently in development. When completed, we expect to realize productivity gains, resulting in compensation savings at current order levels, increased accuracy on shipments and inventory counts, increased flexibility for business growth, and other technology driven productivity improvements. Beginning, in fiscal 2005, credit card and other banking and related fees were included in selling, general and administrative expenses; these fees had previously been classified as interest, fees and other expense, net on the Consolidated Income Statement. Credit card and other banking and related fees for fiscal 2004 have been reclassified to selling, general and other administrative expenses to conform to the current year presentation. These fees increased $144,500 from fiscal 2004 to fiscal 2005, primarily due to higher credit card fees associated with the increase in consumer sales. We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective customers and make decisions regarding extension of credit terms to such prospects based on this evaluation. Accordingly, we recorded a provision for bad debts of $364,900 and $171,600 for the quarters ended September 26, 2004 and September 28, 2003, respectively.
14
We had income from operations of $2.7 million in the second quarter of fiscal 2005 compared to $3.8 million for the second quarter of fiscal 2004. However, included in the $3.8 million income from operations for the second quarter of fiscal 2004 is a benefit from insurance proceeds of $3.1 million, representing the final settlement of insurance claims related to the October 12, 2002 disaster at our Global Logistics Center. The effective tax rates in the second quarter of fiscal years 2005 and 2004 were both 39.0%. Net income was $1.6 million for the second quarter of fiscal 2005, compared to $2.3 million for the second quarter of fiscal 2004, which included the $1.9 million after tax effect of the benefit from insurance proceeds. Earnings per share (diluted) for the second quarter of fiscal 2005 were $0.36 compared to $0.52 for the second quarter of fiscal 2004, which included the $0.42 effect of the benefit from insurance proceeds.
First Six Months of Fiscal 2005 Compared to First Six Months of Fiscal 2004
Revenues increased by $74.4 million, or 49%, to $226.3 million for the first six months of fiscal 2005 compared to $151.9 million for the first six months of fiscal 2004. Revenues from mobile devices and accessories increased 81%, revenues from network infrastructure products increased 17% and revenues from installation, test and maintenance products increased 30%. Network infrastructure, mobile devices and accessories, and installation, test and maintenance products accounted for approximately 29%, 57% and 14%, respectively, of revenues during the first six months of fiscal 2005 as compared to 37%, 47% and 16%, respectively, during the first six months of fiscal 2004. Commercial sell-through customers, commercial sell-to customers and consumers accounted for approximately 30%, 28% and 42%, respectively, of revenues during the first six months of fiscal 2005, compared to 36%, 36% and 28%, respectively, of revenues during the first six months of fiscal 2004.
The increase in mobile devices and accessories revenues was primarily due to strong growth in our affinity consumer-direct sales channel, but also reflects growth in our commercial business. In the first six months of 2005, sales of mobile devices and accessories through our affinity consumer-direct sales channel represented 42% of our total revenues, but because a significant portion of these sales relate to lower margin handset sales as described below, gross profit from this channel represented only 25% of our total gross profit. The significant increase in affinity consumer-direct revenues is attributed to increased volumes from our T-Mobile affinity relationship. Revenues from this affinity relationship collectively accounted for approximately 38% of total revenues in the first six months of fiscal 2005; however, gross profit generated through the T-Mobile relationship represented 19% of our total gross profit. Commercial revenues for mobile devices and accessories increased 25% over the prior year, due in part to enhanced merchandising and packaging programs, new retail relationships and an increase in data messaging product sales.
The increase in our network infrastructure sales is attributable to increases in sales of RF propagation products such as antennas and cable and broadband and in-building products. The market for RF propagation products continues to be challenging, but we believe that pent up demand for new technologies and increased spending in homeland security and public safety have contributed to our growth in this line of business. There can be no assurance that these trends will continue.
The increase in installation, test and maintenance revenues is primarily attributable to increased sales of high dollar test equipment and increased sales of repair and replacement parts under our relationships with several Original Equipment Manufacturers. We believe that the increased capital spending leading to our growth in network infrastructure sales has also contributed to the increase in installation, test and maintenance sales.
Gross profit increased by $8.8 million, or 24%, to $45.4 million for the first six months of fiscal 2005 compared to $36.6 million for the first six months of fiscal 2004. Gross profit margin percent decreased to 20.0% for the first six months of fiscal 2005 compared to 24.1% for the first six months of fiscal 2004. Gross profit margin for network infrastructure, mobile devices and accessories and installation, test and maintenance products was 23.4%, 16.7% and 26.7%, respectively, for the first six months of fiscal 2005, as compared to 24.3%, 22.9% and 27.0%, respectively, for the first six months of fiscal 2004. The decrease in gross profit margin percent for mobile devices and accessories was attributable to the increased revenues from the T-Mobile affinity relationship, which
15
includes high volumes of lower margin handset sales. The decrease in network infrastructure gross margin percent is due to increased lower margin broadband sales and a reduction in gross profit margin for RF propagation sales due to several large build sales during the first six month of the fiscal year. Gross profit margin percent in our installation, test and maintenance line of business has been sustained and the minor variation is related to sales mix within the segment product offering. We account for inventory at the lower of cost or market and as a result, write-offs/write downs occur due to damage, deterioration, obsolescence, changes in prices and other causes.
During the first six months of fiscal 2005, our T-Mobile relationship accounted for 38% of total revenues, or approximately $85 million, and 19%, or approximately $9 million, of our overall corporate gross profit. The gross profit margin on these revenues was approximately 10.1% for the first six months of fiscal 2005, compared to gross profit margin on non T-Mobile revenues of approximately 26.1% for the same period. The 10.1% T-Mobile gross profit margin is after product-material costs only, and does not include operating and indirect expenses necessary to support this business. These expenses are a significant portion of overall selling, general and administrative expenses and include: freight out and distribution supplies; compensation and benefit costs related to fulfillment and returns processing, in-bound call center, program management, and credit and collections; credit card fees and bad debt expenses related to cash collections directly from end users; and e-commerce expenses. Indirect expenses include executive involvement, depreciation of technology and operating assets, facilities, and other overhead costs.
Total selling, general and administrative expenses increased by 11% for the first six months of fiscal 2005 compared to the first six months of fiscal 2004. Because total revenues increased at a higher rate (49%), selling, general and administrative expenses as a percent of revenue declined to 17.8% for the first six months of fiscal 2005 from 24.0% for the first six months of fiscal 2004. The largest factor of the $4.0 million increase in total selling, general and administrative expenses were increased fulfillment costs associated with the large growth in consumer revenue. Consumer orders are typically smaller in size and weight and many items are delivered to residences, not typical places of business. The resulting freight charges we pay to third party common carriers with whom we contract for those deliveries are greater, as a percentage of revenue, than larger commercial shipments. Also contributing to the increase are costs associated with our reward plans including the expensing of stock options and expenses associated with our recently issued Performance Stock Units. Beginning, in fiscal 2005, credit card and other banking and related fees were included in selling, general and administrative expenses; these fees had previously been classified as interest, fees and other expense, net on the Consolidated Income Statement. Credit card and other banking and related fees for fiscal 2004 have been reclassified to selling, general and other administrative expenses to conform to the current year presentation. These fees increased $334,400 from fiscal 2004 to fiscal 2005, primarily due to higher credit card fees associated with the increase in consumer sales. We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective customers and make decisions regarding extension of credit terms to such prospects based on this evaluation. Accordingly, we recorded a provision for bad debts of $683,900 and $274,900 for the six months ended September 26, 2004 and September 28, 2003, respectively.
We had income from operations of $5.1 million for the first six month of fiscal 2005 compared to $3.3 million for the first six months of fiscal 2004. However, included in the $3.3 million income from operations for the first six months of fiscal 2004 is a benefit from insurance proceeds of $3.1 million, representing the final settlement of insurance claims related to the October 12, 2002 disaster at our Global Logistics Center. The effective tax rates in the second quarter of fiscal years 2005 and 2004 were both 39.0%. Net income was $3.0 million for the first six months of fiscal 2005, compared to $2.0 million for the first six months of fiscal 2004, which included the $1.9 million after tax effect of the benefit from insurance proceeds. Earnings per share (diluted) for the first six months of fiscal 2005 were $0.68 compared to $0.44 for the first six months of fiscal 2004, which included the $0.42 effect of the benefit from insurance proceeds.
16
Liquidity and Capital Resources
We generated $5.9 million of net cash from operating activities in the first six months of fiscal 2005 compared to $8.0 million in the first six months of fiscal 2004. In the first six months of fiscal 2005, our cash flow from operations was driven largely by net income plus depreciation and amortization and a large increase in trade accounts payable, partially offset by increases in trade accounts receivable and product inventory. Trade accounts receivable increased due to the timing of collections from our customers, many of whom maintain accounts with open terms. The increase in inventory is primarily related to an increase in handsets and mobile devices and accessories associated with an increase in consumer and retail sales this fiscal year. Accounts payable increased due to the timing of our payments to our vendors and to higher inventory purchases during this fiscal year. In most cases, we have negotiated open payment terms with our vendors and manufacturers. We negotiate the duration of these payment terms when establishing and/or renewing relationships with vendors and manufacturers and attempt to balance the payment terms with other factors such as pricing, availability of competitive products and anticipated demand. The timing of payments related to past purchases, the amount of future inventory purchases and the timing of cash receipts will create periodic significant increases and decreases in accounts payable and cash and cash equivalents, which could cause draws on our revolving credit facility.
Capital expenditures totaled $1.8 million in the first six months of fiscal 2005, primarily related to investments in information technology. In the first six months of fiscal 2004, capital expenditures totaled $2.0 million, comprised primarily of investments in information technology and capitalized rebuild costs associated with our Global Logistics Center.
Net cash used for financing activities was $2.3 million for the first six months of fiscal 2005 compared to net cash used of $869,700 for the first six months of fiscal 2004. During the first six months of fiscal 2005, we purchased 229,403 shares of our outstanding common stock pursuant to our stock buyback program, compared with 112,900 shares purchased in the first six months of fiscal 2004. Through September 26, 2004, under this program, a total of 342,303 shares have been purchased for $3.4 million, or an average price of $9.79 per share. The Board of Directors has authorized the purchase of up to 450,000 shares in the aggregate. We expect to fund any future purchases from working capital and/or our revolving credit facility. No timetable has been set for the completion of this program.
To minimize interest expense, our policy is to use excess available cash to pay down any balance on our $30 million revolving credit facility. There was no balance on this credit facility at September 26, 2004 and we had no draws during the second quarter, and have taken only minimal draws during the first six months of 2005. This facility expires in September 2006.
Effective June 30, 2004, we refinanced our previously existing term loan with a bank. The new term loan in the original principal amount of $4,500,000 is with Wachovia Bank, National Association and SunTrust Bank and is payable in monthly installments of principal and interest with the balance due at maturity, June 30, 2011. The note bears interest at a floating rate of LIBOR plus 1.75%. The note is secured by a first position deed of trust encumbering the Company-owned real property in Hunt Valley, Maryland. The loan is subject to generally the same financial covenants as our revolving credit facility.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies below as critical to our business operations and the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see the Notes to the Consolidated Financial Statements in our Form 10-K for the fiscal year ended March 28, 2004.
17
Revenue Recognition. We record revenue when product is shipped to the customer. Our current and potential customers are continuing to look for ways to reduce their inventories and lower their total costs, including distribution, order taking and fulfillment costs, while still providing their customers excellent service. Some of these companies have turned to us to implement supply-chain solutions, including purchasing inventory, assisting in demand forecasting, configuring, packaging, kitting and delivering products and managing customer relations, from order taking through cash collections. In performing these solutions, we assume varying levels of involvement in the transactions and varying levels of credit and inventory risk. As our solutions offerings continually evolve to meet the needs of our customers, we constantly evaluate our revenue accounting based on the guidance set forth in accounting standards generally accepted in the United States. When applying this guidance, we look at the following indicators: whether we are the primary obligor in the transaction; whether we have general inventory risk; whether we have latitude in establishing price; the extent to which we change the product or perform part of the service; whether we have responsibility for supplier selection; whether we are involved in the determination of product and service specifications; whether we have physical inventory risk; whether we have credit risk; and whether the amount we earn is fixed. Each of our customer relationships is independently evaluated based on the above guidance and revenue is recorded on the appropriate basis. If applying this revenue recognition guidance resulted in recording revenue on a different basis from which we have previously concluded, or if the factors above change significantly, revenues could increase or decrease; however, our gross profit would remain constant.
Impairment of Long-Lived and Indefinite-Lived Assets. Our Consolidated Balance Sheet includes goodwill of approximately $2.5 million. We perform an annual impairment test for goodwill on the first day of our fourth quarter. We also periodically evaluate our long-lived assets and intangible assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on estimated future cash flows, market conditions, operational performance and legal factors. Future events, such as significant changes in cash flow assumptions, could cause us to conclude that impairment indicators exist and that the net book value of goodwill, long-lived assets or intangible assets are impaired. Had the determination been made that the goodwill asset was impaired, the value of this asset would have been reduced by an amount up to $2.5 million, resulting in a charge to operations.
Income Taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability. This review is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Based on this review, we have not established a valuation allowance. If we are unable to generate sufficient taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish a valuation allowance against all or a significant portion of our deferred tax assets, resulting in a substantial increase in our effective tax rate and a material adverse impact on our operating results.
Stock-based Compensation. Effective March 29, 2004, we adopted the fair value provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” using the modified prospective method, as prescribed by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. No compensation expense related to the grant of stock options under our stock compensation plans was reflected in net income for any periods ended on or before March 28, 2004, except as noted in Note 2 of our unaudited consolidated financial statements, presented elsewhere in this Form 10-Q, because we accounted for grants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and all stock options granted in those periods had an exercise price equal to the market value of the underlying common stock on the date of grant. The effect on net income and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 to all stock compensation for the six months ended September 26, 2003 is set forth in Note 2 to our unaudited consolidated financial statements presented elsewhere in this Form 10-Q.
Also under SFAS No. 123, we record compensation expense on our Performance Share Units (PSUs) over the vesting period, based on the number of shares management estimates will ultimately be issued. Accordingly, we determine the
18
periodic financial statement compensation charge based upon the stock price at the PSU grant date; our projections of future EPS performance over the performance cycle; and the resulting amount of estimated share grants, net of actual forfeitures. Future changes in factors impacting the ultimate number of shares granted could cause these estimates to change in future periods.
Additional Risks
We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. In addition to risks elsewhere discussed in this Quarterly Report on Form 10-Q and in our most recent filing on Form 10-K for the fiscal year ended March 28, 2004, included among the risks that could lead to a materially adverse impact on our business or operating results are: the termination or non-renewal of limited duration agreements or arrangements with our vendors and affinity partners which are typically terminable by either party upon several months notice; loss of significant customers or relationships, including affinity relationships; the strength of the customers’, vendors’ and affinity partners’ business; economic conditions that may impact customers ability to fund purchase of our products and services; our dependence on a relatively small number of suppliers and vendors, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; failure of our information technology system or distribution system; technology changes in the wireless communications industry, which could lead to significant inventory obsolescence and/or our inability to offer key products that our customers demand; third-party freight carrier interruption; increased competition from competitors, including manufacturers or national and regional distributors of the products we sell and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; ; the possibility that, for unforeseen reasons, we may be delayed in entering into or performing, or may fail to enter into or perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or anticipated savings; inability to protect certain intellectual property, including systems and technologies on which we rely; and consolidation among large wireless service carriers and others within the wireless communications industry.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Forward-Looking Statements
This Report contains a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, all of which are based on current expectations. These forward-looking statements may generally be identified by the use of the words “may,” “will,” “believes,” “should,” “expects,” “anticipates,” “estimates,” and similar expressions. Our future results of operations and other forward-looking statements contained in this report involve a number of risks and uncertainties, including those described throughout this Quarterly Report on Form 10-Q and our most recent filing on Form 10-K for the fiscal year ended March 28, 2004, and under the heading “Additional Risk Factors” above. For a variety of reasons, actual results may differ materially from those described in any such forward-looking statement. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject.
Available Information
Our Internet Web site address is: www.tessco.com. We make available free of charge through our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission. Also available on our Web site is our Code of Business Conduct and Ethics.
19
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
We have not used derivative financial instruments. We believe our exposure to market risks, including exchange rate risk, interest rate risk and commodity price risk, is not material at the present time.
Item 4 – Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management timely. Our Chief Executive Officer and Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II – Other Information
Item 1 – Legal Proceedings
Lawsuits and claims are filed against the Company from time to time in the ordinary course of business. We do not believe that any lawsuits or claims currently pending against the Company, individually or in the aggregate, are material, or will have a material adverse affect on our financial condition or results of operations.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information with respect to purchases of TESSCO common stock by the Company or any affiliated purchasers during the second quarter of fiscal 2005.
Issuer Purchases of Equity Securities
Period (1) |
| Total Number of |
| Average |
| Total Number of |
| Maximum Number of |
| |
June 28, 2004 through July 25, 2004 |
| 0 |
| n/a |
| 0 |
| 337,100 |
| |
July 26, 2004 through August 29, 2004 |
| 93,276 |
| $ | 11.53 |
| 93,276 |
| 243,824 |
|
August 30, 2004 through September 26, 2004 |
| 136,127 |
| $ | 11.17 |
| 136,127 |
| 107,697 |
|
Total |
| 229,403 |
| $ | 11.32 |
| 229,403 |
| 107,697 |
|
(1) Periods indicated are fiscal accounting months for the second quarter of fiscal 2005. On April 28, 2003, our Board of Directors announced a stock buyback program and authorized the purchase of up to 450,000 shares of our common stock pursuant to the program. As of September 26, 2004, we have purchased an aggregate of 342,303 shares of our outstanding common stock pursuant to this program for
20
$3,350,000, or an average price of $9.79 per share. No timetable has been set for the completion of this program and the program remains in effect at present. All shares repurchased during the second quarter of fiscal 2005 were repurchased under this program.
Item 3 – Defaults upon Senior Securities
None
Item 4 – Submission of Matters to a Vote of Security Holders
The information regarding the submission of matters to a vote of security holders, set forth on page 17 of the Company’s quarterly report on Form 10-Q for the three months ended June 27, 2004, filed August 11, 2004, is incorporated herein by reference.
Item 5 – Other Information
None
Item 6 – Exhibits
10.1 |
| TESSCO Technologies Incorporated Amended and Restated 1994 Stock and Incentive Plan (incorporated by reference to Exhibit 4.1.1 to The Company’s Registration Statement on Form S-8 filed with the United States Securities and Exchange Commission on August 12, 2004) |
10.2 |
| Credit Agreement dated June 30, 2004, by and among the Registrant and affiliates, and Wachovia Bank, National Association, SunTrust Bank and the lenders party thereto from time to time. |
10.3. |
| Term Note of Registrant and affiliates dated June 30,2004, payable to Wachovia Bank, N.A. and SunTrust Bank. |
10.4 |
| Guaranty Agreement dated June 30, 2004, of TESSCO Incorporated, to and for the benefit of Wachovia Bank, N.A., as agent |
31.1 |
| Rule 15d-14(a) Certification of Robert B. Barnhill, Jr., Chief Executive Officer. |
31.2 |
| Rule 15d-14(a) Certification of Robert C. Singer, Chief Financial Officer. |
32.1 |
| Section 1350 Certification of Robert B. Barnhill, Jr., Chief Executive Officer. |
32.2 |
| Section 1350 Certification of Robert C. Singer, Chief Financial Officer. |
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TESSCO Technologies Incorporated | |||
|
| |||
|
| |||
Date: | November 10, 2004 | By: | /s/Robert C. Singer |
|
| Robert C. Singer | |||
| Senior Vice President and Chief Financial | |||
| (principal financial and accounting officer) | |||
22